StockBeat: It's Lufthansa's Turn to Send Europe's Airlines Tumbling

By Geoffrey Smith

Investing.com -- Europe’s airline stocks are taking another battering in early trading on Monday after German flag carrier Lufthansa issued the latest – and arguably the direst - in a string of profit warnings from the sector in recent weeks.

At 04:30 AM ET (0830 GMT), Lufthansa (DE:LHAG) stock was down over 12%, after the company said its Eurowings subsidiary will lose money this year as a result of lingering overcapacity and fierce competition in the low-cost sector. It also said its cargo operations would be less profitable than previously thought. Even unit revenues at the core Luthansa brand, with its more insulated long-haul flights, are now expected to fall over the fiscal year by “a low single-digit percentage”. Consequently, it’s scaling down its plans to expand in that area and now sees only “marginal” capacity expansion over the coming winter season.

Adding insult to injury, the Frankfurt-based airline said it also set aside 340 million euros against a possible tax bill related to issues going back 18 years.

The news prompted another general revaluation of the sector: low-cost competitors suffered most with EasyJet (LON:EZJ) down 3.7%, Wizz Air (LON:WIZZ) down 2.6% and Ryanair Holdings PLC (LON:RYA) down 3.6%, but Air France KLM (PA:AIRF) was also down 3.5% and International Airlines Group (LON:ICAG), parent of British Airways and Iberia, was down 2.8%.

They’re all underperforming the benchmark Euro Stoxx 600, which was effectively unchanged at 378.92 points. Germany’s Dax was down less than 0.1%, while the U.K. FTSE was up by a similarly modest amount at the start of a week overshadowed by some important central bank meetings.

Lufthansa’s tax bill added a surprise element to an otherwise predictable tale of woe: costs at Eurowings have also been stickier than assumed and the company said it would unveil further cost-cutting measures “shortly”; fuel costs have risen in line with oil prices – Lufthansa now expects its group fuel bill in the current fiscal year to be 550 million euros ($615 million) higher than previously estimated; and the European economy has weakened (the Deutsche Bundesbank earlier this month slashed its 2019 growth forecast for Germany, Lufthansa’s home market, to only 0.6%).

The economic slowdown is making Europe’s short-haul carriers pay heavily for missing a golden chance to remove excess capacity from the market in 2017 when Air Berlin collapsed. Instead, in a collective fit of overconfidence, there was an undignified fight for market share, in which Lufthansa was one of the guiltier parties, buying most of Air Berlin’s operations for a cut-price 210 million euros.

The consequences are now plain for all to see: the STOXX Europe Total Market Airlines index is now down 13% for the year, more than any other major sector index.

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